What brought Subrata Roy under legal tussle?

One could hardly imagine that the chief of a business entity was made to bow before the law. But it became reality on Wednesday when the Supreme Court issued a non-bailable warrant (NBW) against Sahara chief Subrata Roy for non-appearance despite a summon.

The summon was sent in connection with over two-year long Sebi-Sahara legal fight, which started in August 2012, when after being authorised by the Supreme Court, the Securities and Exchange Board of India (SEBI) had asked Sahara to refund Rs 24,000 crore to investors. 

Timeline of the events. 

The entire string of events kicked off in 2008, when Sahara Group established Sahara India Real Estate Corporation Ltd. (SIECLE) and Sahara Housing Investment Corporation Ltd. (SILICL). These two entities were used to pump up huge investment through issue of OFCD to collect money from investors. It was successful in generating Rs. 24,000 cr from 23 million people, mostly from villages and small towns subscribed to this scheme. 

Now question arises what OFCD is. OFCD stands for Optionally fully-convertible debentures. These are the debentures that can be converted into shares, when debt holder (investor) wishes (after expiry of a particular pre-decided date).

December 2009: Few months after Sahara India Real Estate Corporation Ltd. (SIRECL) and Sahara Housing Investment Corporation Ltd. (SHICL) filed Red Herring Prospectus with Registrar of Companies to issue IPO (Initial Public Offer), Sebi received complaint from Professional Group for Investor Protection against SIRECL and SHICL alleging illegal means used by these two firms in issuance of OFCDs to the public throughout the country for many months.

January 2010: Similar complaint received against Sahara group from one Roshan Lal through National Housing Bank. Sebi sought clarifications from the group. Further investigations found that the funds were raised through OFCDs after filing RHPs (red herring prospectus) with the Registrar of Companies, although the rules required permission from Sebi for any issuance of securities to 50 or more investors. In these cases, the number of investors ran into crores.

The SIRECL and SHICL floated an issue of OFCDs and started collecting subscriptions from investors with effect from 25th April 2008 up to 13th April 2011 from about 3 million investors in the guise of a "Private Placement" without complying with the requirements applicable to the public offerings of securities.

2011: SEBI took cognizance of the matter passed an order dated 23rd June, 2011 thereby directing the two companies to refund the money so collected to the investors and also restrained the promoters of the two companies including Mr. Subrata Roy from accessing the securities market till further orders.

Against this order, Sahara then preferred an appeal before Securities Appellate Tribunal ("SAT"), which confirmed and maintained the order of the SEBI.

Sahara went in appeal before the Supreme Court of India against the SAT order. The judgment of the Supreme Court clarified following points:

Issue of Jurisdiction of SEBI: Section 55A, which empowers SEBI, was inserted in the Companies Act 1956 by the Companies (Amendment) Act, 2000 w.e.f. 13.12.2000. The Statement of Objects and Reasons give an indication of the intention of the Legislature read as follows:

"to provide that the Securities and Exchange Board of India be entrusted with powers with regard to all matters relating to public issues and transfers including power to prosecute defaulting companies and their directors."

Issue of Private Placement.It has been decided by the SAT in the matter of Toubro Infotech and Industries Limited and Another vs. SEBI, that "an invitation to subscription made to 50 or more persons ceases to be a private placement."

Also first proviso to section 67(3) says that if an offer of securities is made to more than 49 persons then, it will not be a private placement and such offer is public offer. But the second proviso to Section 67(3) implies that other than non banking financial companies or public financial institutions under Section 4A of the Companies Act, no other entity is exempted from the ‘Rule of 50’.

It was observed by the SC that through issue of Information Memorandum under Section 60B of the Companies Act, which is only meant for public issues, the actions and intentions on the part of the two companies clearly show that they wanted to issue securities to the public in the garb of a private placement bypassing the various laws and regulations in relation to that. The Court observed that the Sahara Companies have issued securities to more than the threshold statutory limit fixed under proviso to Section 67(3) and hence violated the listing provisions attracting civil and criminal liability.

Jurisdiction of SEBI: This judgment was a very crucial one for SEBI as it not only affirmed its jurisdiction and power to administer various provisions of the Companies Act, but also clarified that even unlisted companies (whether private or public) which intend to (by conduct or otherwise) get their securities listed on any stock exchange fall within the radar of SEBI. 

It also directed the Sahara Group and its two group companies SIRECL and SHICL to refund around Rs 17,400 crore to their investors within 3 months from the date of the order with an interest of 15%. The Supreme Court while confirming the findings of the SAT further asked SEBI to probe into the matter and find out the actual investor base who have subscribed to the Optionally Fully Convertible Debentures (OFCDs) issued by the two group companies SIRECL and SHICL.